The Market Today
Markets Calming (It Appears); Small Business Confidence Remains Strong
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC NEWS
Small Business Confidence Continues to Roar: Small business confidence for the month of January rose more than expected, up from 104.9 to 106.9 according to the NFIB’s survey. The confidence reading remains consistent with very strong economic growth, from a historical correlation (see Chart of the Day). However, this economic environment is likely to prove different than previous cycles (no economist is projecting 8+% GDP growth). In the underlying components, the sales index did pull back 3 points but remains very strong. Plans to hire were unchanged but remain at a level consistent with good job growth. Those who view jobs as hard-to-fill rose 3 points which should be an indicator of firmer wage pressure (although the correlation has been very loose during this cycle). And compensation plans from survey respondents ticked up another point, remaining at their highest level of this cycle. As for investment indicators, the now-is-a-good-time-to-expand index rose to its highest level on record. According to a press release from NFIB CEO Duggan, “Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses.” Finding qualified workers remains as the biggest challenge for small business owners today.
Yesterday – Stock Bulls Regained Their Composure as Last Week’s Net Selling Enticed Buyers Back Into the Market: The Dow tacked on 410 points (1.7%) to last Friday’s 330-point (1.4%) gain, trimming its net loss over the last seven sessions (starting February 2) to 1,585 points (-6.1%). Earlier in the day, the Dow had gained as many as 574 points which put the index almost on top of the 50%-retracement line of its most extreme 2,800-point loss (10.8%) from last week’s turmoil. The S&P 500 and Nasdaq rallied 1.4% and 1.6% respectively. Equities, which fell into a rate-induced tailspin beginning February 2, seemed more comfortable with higher yields to start the week; at least for now. Treasury note yields ticked higher with the 10-year yield up 0.7 bps to 2.86%, its highest close since January 2014, after earlier reaching 2.89%. The 5-year yield closed 1.5 bps higher at 2.56% and the 2-year yield finished essentially unchanged at 2.08%. In addition to the healthy stock gains and in the absence of any significant economic data (Treasury’s monthly budget statement showed a smaller-than-expected surplus), headlines also focused on the White House’s $4.4T deficit-increasing fiscal 2019 budget proposal – largely a ceremonial event – and a 55-page document detailing the administration’s infrastructure plans.
Overnight – Equity Rebound Pauses in Europe, Sovereign Yields Edge Down: Global equities showed a greater hesitancy to fall in line with yesterday’s U.S. rally as a mostly positive start in Asia failed to prop up positioning in Europe. As European equities weakened, U.S. futures softened with contracts for March settle on the Dow, S&P, and Nasdaq all down roughly 0.4%. Less liveliness on the equity front has drawn a bid for developed nation sovereign debt, with most curves flattening a touch on lower yields. Longer yields edged lower as a consolidation has continued in the search of new trading ranges at higher levels. The U.S. and German 10-year yields were down roughly 1.5 bps and 2.1 bps to 2.83% and 0.73% respectively. The U.S. 2-year yield is up 1.4 bps at 2.09%. Yields in the U.K. ticked up after YoY CPI inflation held at 3.0% (expected 2.9%). The Dollar has eased for a second day and, against the Yen, is at its weakest level since the U.S. election. Maybe surprisingly, the Dollar benefitted from last week’s global risk rout as the currency’s appeal from a relative-risk perspective outweighed its placement in the relative-value pecking-order from a growth or monetary policy perspective. Oil prices also returned lower after small gains yesterday broke a six-day stretch of heavy declines.